Are you going to finance the purchase of an apartment or building a house with the help of a bank? Interest and commission are not the only fees associated with such an enterprise. So get to know all the costs of your mortgage and find out how much money you really need to buy or build a property for a loan.
Credit costs – basic information
When buying a property, you have to consider several types of expenses. Even if you use only your own funds, in addition to the price of the apartment or house, you are required to pay, among others, court fees or notary’s fees.
Also remember that with the cash option there are so-called cost of lost opportunities. In other words, instead of spending on a house or flat, you could invest in secure bonds and get regular profits from it. In a loan-financed transaction, such a “loss” is much smaller, because you mainly use the bank’s funds. In her case, however, there are fees for the lender and more.
Main costs of the mortgage
The interest rate and commission for the bank, compared to the amount of financing and the loan period, can significantly affect how much a mortgage costs. The amount of interest and commission as well as products from tying determine the attractiveness of a given loan offer.
The loan interest rate
One of the most important mortgage costs is of course interest rate. It is a kind of remuneration for the lender for making funds available. They consist of two elements: a fixed bank margin and a variable interest rate depending on the Viloan rate.
For a good few years, the majority of offers have a margin of around 1.5-2.5%, while the Viloan rate is at 1.7-1.8%. Based on the sum of these values, i.e. the total annual interest rate on the loan, the amount of monthly interest and loan installments is calculated.
The borrower can benefit from a fixed interest rate, which is usually slightly higher than the floating rate, but provides security for a period of 5 years. If the Monetary Policy Council raises interest rates during this period, it may turn out that such a decision helped save on interest.
Commission for the bank
When granting a mortgage, the bank also usually charges a one-time commission. Although it is sometimes called differently (e.g. fee for processing an application or granting a loan), it is always calculated in the same way. It is a percentage of the amount of funding granted that is determined by the bank. The commission for the bank is usually from 0 to 2.5%, which means that when borrowing, for example, 300,000 USD, you have to pay an additional from 0 to even 7,000 USD.
Hidden mortgage costs that cannot be avoided
If you want to finance the purchase or construction of a property with the help of a bank, you must also be prepared for several other loan-related costs. Most of them are much lower than the total amount of interest or bank commission, but each is mandatory and increases the total cost of the loan.
Real estate appraisal
In the loan application, you indicate the price of the property being purchased or its target value (in the case of construction). The bank still needs documents confirming its real value. That is why you must use the services of a real estate appraiser who will carry out the appraisal report. Such a specialist may work for the lender, but you can also choose another appraiser that he accepts (if the bank allows it). You will pay from several hundred to over 1200 $ for assessing the value of a property, depending on its size and location.
Real estate insurance
Because the property is collateral for loan repayment, each bank requires insurance. A policy for a flat or house can cost from about $ 300 to over $ 1,000 a year. Its price depends, among others, on the type, size and location of the property, as well as the security devices used, and of course the scope of protection.
Real estate insurance for the purposes of credit usually covers the so-called walls (walls) and solid elements (doors, floors, sanitary fittings and electrical installations). Most often, such basic insurance protects a bank against a situation of total destruction as a result of a fire or other random event of the property being the subject of collateral for the loan.
This is another, third cost of a mortgage that is directly related to the property. Bridging insurance works only in the period preceding the final entry of the mortgage in the land and mortgage register (usually you have to wait for it no more than a few months). When buying a property from a developer who is just building a property, such insurance may take several or even several dozen months.
The policy protects the bank against the risk of loan defaults in the first months after receiving the funds. From your perspective, it means a temporary increase in the margin of about 1 percentage point. This translates into an additional cost of several dozen to several hundred USD per month.
Purchase of such protection is not mandatory in every bank. Thanks to the life insurance policy, in the event of the borrower’s death, the insurer pays for him the outstanding amount. Were it not for the policy, this obligation would pass to his family.
The cost of life insurance for a mortgage depends not only on the scope of protection, but also on the amount of the loan. In practice, the insurance premium here is usually a percentage of the fee, calculated from the outstanding amount of the liability. Considering a $ 300,000 loan and 0.3% premium, the policy price in the first year will be $ 900. In subsequent periods this value will gradually decrease.
It is worth noting that after a few years of timely repayment of the loan, you can most often, without causing negative changes in repayment terms, cancel your life insurance policy.
Real estate inspection fee
This cost of a mortgage arises when you build a house with the help of a bank or buy a new apartment that has not yet been opened. A bank employee appears at the construction site before the payment of each subsequent tranche of the loan. Each time such real estate inspections involve a fee of approximately $ 150-200.
Other mortgage costs – they may or may not appear
In practice, the list of potential mortgage costs is even longer. In certain situations, you have to take into account several other expenses that will increase the total cost of incurring the commitment.
Low own contribution insurance
As per the recommendation of the Polish Financial Supervision Authority, clients interested in a mortgage must make a minimum own contribution of 20% of the value of the property purchased. You can circumvent this provision only if you collect the equivalent of at least 10% of the potential loan amount, and at the same time use the so-called low own contribution insurance. The latter is payable in advance or added up proportionally to each monthly installment until 20% of the sum of financing is reached. This solution costs a total of several hundred to several thousand USD. Several banks, including Bankate and Santander accepts the replacement of own contribution with a second property.
Practice shows that many mortgage loans are repaid before the loan period agreed with the bank expires. Remember, however, that although it is generally worth overpaying the loan, it is often profitable only after a certain period. In other words, if you have extra cash and you want to pay several installments in advance, check first that the bank will not charge for it. In accordance with the regulations, he may charge a commission on overpaid amounts (maximum 3%) for the first 3 years of the duration of the contract. You will find all the information in the loan agreement.
There is another fee associated with shortening the loan period. Some banks, after overpayment reduce the amount of the loan installment. If the borrower wants to shorten the loan period, an annex is required, which costs 0.5% commission on the loan balance.
Total mortgage repayment
Only a few years ago, banks had the right to charge a commission for early repayment of the entire loan throughout the contract period. Currently, much more favorable provisions are in force in this respect. You can return the total loan amount, without any additional fees, only after 3 years from the conclusion of the contract. Total repayment within 3 years may prove unprofitable, because then the bank may apply a commission of up to 3% of the amount returned.
Additional banking products
Many banks are willing to lower their margin or commission as long as you use their additional products. As part of cross-selling (tying), in addition to a mortgage, the lender may propose a credit card, investment or insurance package or a personal account.
Usually, the more products you use, the better repayment terms the lender will offer. Remember, however, that they usually involve fees that, when added up, can consume up to several thousand USD per year. And this makes the offer no longer attractive.
How much does a mortgage cost?
A loan for a house or flat, regardless of the amount borrowed, is a huge monthly burden for the household budget. Be aware, however, that you incur the largest one-off mortgage costs at the outset.
How much do you need to have “to start” when making a commitment at the bank?
Here is a summary of all credit-related fees that you need to be prepared for when you buy your property.
When calculating, we assumed that you are interested in buying an apartment from the secondary market for $ 300,000:
- 20% own contribution – $ 60,000 (or 10% – $ 30,000);
- property valuation – $ 400;
- commission for granting a loan – from 0 to 2.5%;
- notary’s tax – approximately $ 2,000;
- court fees – a total of about $ 700;
- 2% tax on civil law transactions – $ 6,000;
- real estate agency commission 2-3% + VAT.
To be able to take out a $ 270,000 mortgage (the actual amount of funding after deducting your own contribution), you must have a minimum of $ 55,000 in cash. As shown by the summary, a significant amount are tax liabilities and court and notary fees. After settling all these expenses and concluding the mortgage contract, the most important cost will be monthly interest.